A common refrain I heard during the 1990s and 2000s was to invest in stocks “for the long haul.” When I asked what “long haul” meant, I faced blank stares. People were conditioned to accept the “buy and hold” approach for stock investing. The approach advocated buying stocks and holding them without concern when market dips occurred. Market dips gave investors opportunities to double down. A term used to describe this type of investing was “dollar cost averaging.” For the preceding generational period (1982-2007), this type of investing proved successful. Studies showed that investors moving in and out of stocks during those years fared poorly, solidifying the "buy and hold" approach.

What happens to “buy and hold” when investors face what I would term a multi-generational bear market?  That would be a bear market that lasts an entire generation, or roughly 25 years. During the depths of the last bear market in 2008, there was evidence the public continued to “hold” with some pundits recommending to “buy” based on the perception of cheap stock prices. Fidelity Investments, a custodian for 401(k) accounts, reported very little movement out of stocks despite significant losses in the value of 401(k) accounts.  

The most difficult aspect of stock investing, and perhaps investing in general, is to know when to take a loss. Take a loss? My experience in dealing with investors of all stripes is that most have no plan to exit a stock after it experiences losses or even gains. The most common response is to buy and hold since the market always “comes back” – or at least that is what they hear.  Unfortunately, during a protracted bear market, the point at which the market “comes back” can be many years in the future. 

Significant downward movements in averages such as the Dow Jones Industrials or the S&P 500 categorize bear markets. Some experts suggest that a 10% retracement constitutes a bear while others feel 20% is a better gauge. Large percentage downward movements occurred in the markets in the years concluding in 1974, 1982, 2002, and 2009. The most recent example of a multi-generational bear market began during the Great Depression.   During the Great Depression, the top of the market occurred in 1929 and the bottom came in 1932. The top of 1929 remained for another 25 years!    

The accompanying chart shows the amusement park ride an average investor experienced in 1929. First the value of their stock portfolio plummeted by 85% in 3 years. Then, the stock prices they witnessed in 1929 remained until 1954. How did “buy and hold” feel for those investors?  Would you feel comfortable seeing your stock portfolio behave in a similar manner for 25 years? Using 2007 as the most recent market top (before the current high), could you continue to “buy and hold” until the year 2032?

There are considerations to the holding period, which many advisors would suggest is associated with the age of the investor. This is the reason for the creation of funds with a specific calendar year association that are often options in 401(k) accounts. I wonder how many redemptions there would be in those funds with a movement like from 1929-1932?

A field of study called neurofinace, a marriage of biology, psychology and economics sheds new light on the propensity to buy and hold. It also attempts to explain what happens when fear takes hold. Humans have two brains. One brain, called the limbic system, is our survival brain. It controls emotion and is prone to herding or following the crowd. The other brain is the pre-frontal cortex, which is our logic center. Most investors believe they use the pre-frontal cortex to make investment decisions. Scientific research suggests the opposite.  When the collective limbic system of the investing public changes, there will be less interest in stocks. I discuss investor psychology in a chapter of my book Escaping Oz: Navigating the crisis.

There are varying opinions about the state of the current stock market. I will briefly introduce the terms secular and cyclical in the chart below.  If we use the term "secular" to describe a cycle, it relates to a specific valuation environment. We can define a secular bull market as that which starts from a low P/E ratio and progresses to a higher ratio. If we concede that investors will buy stocks irrespective of dividend, then they are also willing to pay higher prices in the expectation of future appreciation. In a secular bull market, if earnings maintain stability, higher stock prices will reflect a higher P/E ratio. If earnings decrease, stable stock prices increase the ratio. If earnings increase, prices would increase proportionately more, in a secular bull.

The bottom line is this: secular bull markets do not start from elevated P/E ratios. The current stock market did not plumb the depths of a low P/E ratio after its 2000 or 2007 top, to begin anew. Readers with more interest on this topic can click HERE for an article I wrote on this topic.

The next secular bull market will not begin until the market touches much lower P/E ratios. Your author is a student of a 20^th century commodity trader by the name of W.D. Gann. Gann described the bottom of a market as one where there was little interest and an utterly destroyed psychological foundation for further buying. In a “multi-generational” bear market, the lack of interest and the destruction of the psychology increase proportionately. The effects of this destruction will be evident in the lack of confidence the public has in stock market participation. We are not at this point.  Will you be able to buy and hold during that market move?